Navigating Elevated Interest Rates: Debt Strategies That Work for Small Businesses
“In the near term, risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation.” - Jerome Powell, September 17, 2025 FOMC meeting
The Fed faces a balancing act of trying to keep inflation low while maintaining their dual mandate of price stability and maximal employment.
Despite the Fed cutting rates within the last two weeks, the theme we’re seeing with interest rates is higher for longer.
The economy isn’t signaling a need for the Fed to cut further, economic growth rebounded sharply in Q2 at +3.8% which further strengthens the Fed’s stance on keeping rates around where they are today.
Higher borrowing costs mean lower profit margins which creates headwinds for future expansion.
A $800k equipment loan today at 7.5% will cost you $339,536 over 10 years in interest whereas in the recent 5 years ago at 4% over the same 10 years would have cost you $171,953.
Costs of capital today mean strategic debt acquisition is required to continue to grow.
Today when looking at a balance sheet, I like to collect inventory of the existing debt available today - all loans, maturities and underlying collateral.
This gives us an idea of potentially unoptimized loans - old terms that could be updated.
Consider variable-line rates tied to prime + spread, today that could be 8%+ for businesses whereas converting this to a fixed/hybrid structure could help provide structure and increase margins.
There’s frequent conversation around refinancing - but less conversation around improving structure and flexibility of your existing loans.
For example, consider at $500k loan on Prime plus floating rate loan, you could consider interest rate caps, swaps, or collars.
You can swap your variable for a fixed rate, provided flexibility in cash flow is available - or vice versa if you prefer the stability.
An interest rate cap, which can be looked at as insurance for potential rising rates, would be a initial premium paid to ensure your rate doesn’t rise above a specific level.
If rates exceed the stated level, the bank pays the difference.
This could be used for variable rate loans on larger debt details to ensure your contain your cost of capital.
Or if you wanted to get fancy, you could consider a collar - this combines a cap and a floor - setting both a minimum and maximum rate you’ll pay.
As a risk management tool, this is great option if we’re entering periods of more unknown future interest rate.
The Fed does a good job at communication their intent in FOMC meetings but the economy will drive Fed decisions and it’s not uncommon for things to change on a dime when presented with new information.
Something else I’ve seen work is SBA 7(a) or 504 loans as tools to utilize alternative sources of financing.
It isn’t always the case that SBA loans will be more attractive rate wise than bank options, but I have seen this come into play because they typically have longer terms, lower equity requirements, and more flexible underwriting.
Something else I’ve seen is utilizing securities backed lines of credit (SBLOC) to add another tool in the debt financing toolbox.
Banks like SBLOCs because the underlying collateralized assets are liquid. If the bank needs to call the loan when margin calls can’t be met, then they sell securities in the open market and they’re made whole in a matter of days.
With traditional collateralized assets, assets aren’t as liquid and selling less liquid assets will take longer.
In many instances, I’ve seen SBLOC rates start at Prime minus instead of Prime plus - because of this, if we can generate an additional .50%+ in interest expense savings upon debt acquisition, this will lower total repayment costs and increase margins.
Growth will continue to reward those who manage structure, just not rates - those who know their debts, rebalance intelligently, and manage liquidity will engineer resilience into their business.